Returns On Capital Signal Tricky Times Ahead For 360 Ludashi Holdings (HKG:3601)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think 360 Ludashi Holdings (HKG:3601) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for 360 Ludashi Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = CN¥54m ÷ (CN¥563m - CN¥52m) (Based on the trailing twelve months to June 2021).

Therefore, 360 Ludashi Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Interactive Media and Services industry.

Check out our latest analysis for 360 Ludashi Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for 360 Ludashi Holdings' ROCE against it's prior returns. If you'd like to look at how 360 Ludashi Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at 360 Ludashi Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 44% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On 360 Ludashi Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for 360 Ludashi Holdings have fallen, meanwhile the business is employing more capital than it was four years ago. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, 360 Ludashi Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.